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Question;Simon and Theodore are father and son and have each been operating reasonably successfulbusinesses independent of each other. They have recently concluded that their individualstrengths would be more successful if they combined their businesses together and have beenformulating a plan to bring their businesses together as a single entity. They have been operatingtheir businesses as separate sole proprietorships but now want to both put them together andobtain some legal liability protection.Alvin is Theodores best friend since grade school. Alvin would like to participate in the newbusiness venture but has limited cash to contribute. He has offered to do all the start upaccounting and legal work in exchange for a portion of the new business. Even though Simon isnot sure about Alvins work ethic, he agrees to let Alvin become part of the new business.The assets and liabilities they each contribute are included in the excel spreadsheet under the tabAssets Contributed.On February 1, 2012, the contributions are finally completed and all of the legal agreementssigned by all of the parties. Simon contributed his existing business, with the exception of theland and building he owns where the business will be operated. Theodore contributed all of hisbusiness assets and liabilities. Alvin contributed a little bit of cash and his services prior to thefinal contributions which were valued at $75,000. The new entity was formed in January 2012 inanticipation of the contributions by each party.As it turns out, at least looking at the trial balance included in the excel spreadsheet (tab TrialBalance), the combining of the two businesses has resulted in increased sales and profits and thenew business entity is very successful.Alvin turns out to be a pretty good financial accountant and has completed the trial balance as ofthe end of the year. You have had a number of discussions with Alvin and have found out thefollowing information about the new business. The name of the company is AST Records. Thebusiness is manufacturing vinyl records for various recording artists. As a part of the business,the company not only manufactures the vinyl albums but also does the art work for the albumcover. Alvin has chosen the accrual method for book purposes and sees no reason why the taxreturns should be anything different. Inventory is a significant part of the revenue productionprocess. Since the entity was just formed at the beginning of the year, there were no reserves orother accruals as of the start date of February 1, 2012. Because the company has turned out to bemore successful than they ever planned, there is a significant amount of cash on the balancesheet at the end of the year. Simon has taken some of the extra cash and made investments invarious stocks (other than DaveCo, all are less than 20% ownership of the stock investment) andbonds to provide at least some interest and dividend income. All of the investments arepresented at fair market value using the Available for Sale accounting method. Alvin knewenough about this method that he correctly included the increase in value from original cost inthe Other Comprehensive Income account (but did not do so net of tax which you can safelyignore for purposes of this exam).During the year, some of the equipment contributed by Simon was sold for a book loss.Additionally, Simon sold some investments for gains and losses. All of the necessary details areincluded on tabs Fixed Asset Sales and Sale of Investments.In August, Simons friend Dave approached Simon with an idea for a related business. Davethought opening a recording studio for local bands would fit well with the existing vinyl recordbusiness and proposed a new venture. Simon was initially skeptical but agreed to form a newcorporate subsidiary of AST Records along with Dave. AST contributed $450,000 in cash to thenew entity in exchange for 45% of the common stock of the new company called DaveCo.Dave contributed some assets and his services for the remaining 55% interest. Alvin knows thatif you own between 20% and 50% of a business, then you account for it using the Equity Methodfor GAAP, but he has no idea what you do for tax purposes. The details on DaveCo are includedon tab DaveCo Rollforward. You do NOT need to worry about the formation of DaveCo asthat is not part of this exam.As mentioned earlier, Simon retained ownership of the land and building where AST Records islocated. AST pays Simon monthly rent of $9,000 that is payable on the first of each month forthe PRECEEDING month.Alvin, Simon, and Theodore are all employees of AST Records as well as owners. Simon madea choice early on that all employees would be paid once per month on the 1st of each month forthe past months work. This was so he would never pay anyone in advance for work they hadnot yet done. AST Records has four employees in addition to Alvin, Simon and Theodore, all ofwhom have been with the company since February 1, 2012. None of the accrued vacationbalance at the end of the year was paid within 2 months of year end.During the year, the company needed some new fixed assets. Details of the acquisition dates andbook depreciation calculations are included on the tab Book Depreciation.Here are some details to help you finish the forms (do not get caught up in googling things suchas whether I have the proper zip code, etc. that just wastes your time):AST Records1234 Album DriveLas Vegas, NV 80024Simon and Theodore live together at4567 Chipmunk LaneLas Vegas, NV 80024Alvin lives at9876 Burbank RoadLas Vegas, NV 80025Below are the Social Security numbers for each of the owners:SimonTheodoreAlvin555-55-5556333-33-3334111-11-1112For any tax calculation, use a flat rate of 34%. Do not use the graduated rates.


Paper#38946 | Written in 18-Jul-2015

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